Steady As She Goes
Evidence continues to point to continued, moderate growth in the United States economy. Take last Friday’s June employment report, for example. Jobs grew by 224,000 in the United States during June, better than expected. Hourly wages are rising 3.1%, about 1% higher than inflation, suggesting a steady backdrop for household spending. The performance was not so strong, however, as to suggest the Federal Reserve needs to revisit rate hikes anytime soon. The overall unemployment rate remains near 3.7%, below what many economists see as “full employment”, but without actual signs of inflation, there is little anxiety over a potential outbreak of 1970’s style wage-push inflation.
The “steady-as-she goes” jobs report squares with other signals suggesting stability at home. The June Institute of Supply Manager’s ISM report, for example, is at 51.7 suggesting moderate output growth. Overall, the jobs and manufacturing data seem to point to a mixed picture consistent with a moderately expanding economy.
Better Here than There
The same cannot be said for the rest of the world, however. Germany just reported very disappointing industrial orders. This follows a sharp decline in German Business Confidence on the heels of rising U.S. China trade tensions and slowing global growth (chart, below). IHS Markit’s purchasing manager indices (PMIs) for China, Europe, Germany, and the U.K. are all below 50 (signals contraction). Importantly, global bond markets are still pointing to weak conditions outside our borders. While the U.S. 10-year Treasury bond yield slipped back to 1.95%, they seem to be following other countries’ lead. The 10-year German bond has fallen to a -0.4% yield and France’s 10-year bond is at -0.1%. Lower starting bond yields should weigh on fixed income returns from here.
Sticking with Tactical Allocations
We continue to see a relatively more stable situation playing out in the United States versus other parts of the world. While this could change at some point, and we do see value developing overseas, our current read on the data still favors the United States. Therefore, we are sticking with our tactical tilt favoring the United States over other parts of the world and developed markets over emerging. Fading growth in places like Germany, where long-term rates have turned negative, continue to point to a relative return and growth advantage right here at home.
Kevin Caron, CFA, Senior Portfolio Manager
Chad Morganlander, Senior Portfolio Manager
Matthew Battipaglia, Portfolio Manager
Steve Lerit, CFA, Client Portfolio Manager
Suzanne Ashley, Analyst
WCA Fundamental Conditions Barometer Description: We regularly assess changes in fundamental conditions to help guide near-term asset allocation decisions. The analysis incorporates approximately 30 forward-looking indicators in categories ranging from Credit and Capital Markets to U.S. Economic Conditions and Foreign Conditions. From each category of data, we create three diffusion-style sub-indices that measure the trends in the underlying data. Sustained improvement that is spread across a wide variety of observations will produce index readings above 50 (potentially favoring stocks), while readings below 50 would indicate potential deterioration (potentially favoring bonds). The WCA Fundamental Conditions Index combines the three underlying categories into a single summary measure. This measure can be thought of as a “barometer” for changes in fundamental conditions.
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